Revenue Laws Amendment Bill: response to hearings

Madam Speaker. The Bill before the Parliament today represents the closing chapter of two years of fundamental structural tax reforms, which included the introduction of the Capital Gains Tax (CGT) and the residence-based income tax system with a view to broadening the tax base This Bill ensures these reforms will work more smoothly and consistently with one another. It also seeks to remove some anti-avoidance rules that impose unnecessary hurdles to valid business transactions.

This Revenue Laws Amendment Bill ensures that the various tax aspects of all the reforms fully tie together. This adjustment process is a typical natural by-product of any major legal change. Indeed, in many developed countries, this process can take years to unravel - a process that we expect to avoid with a clear intention of lowering tax rates and rendering this economy a more attractive investment destination. The Revenue Laws Amendment Bill accordingly makes technical adjustments to all the base-broadening efforts.

The biggest changes came in two areas. First, sweeping technical changes were made for the tax rules regarding company reorganisations. Second, sweeping technical changes were made for the taxation of foreign currency. Both levels of changes were instigated by extensive internal review within National Treasury and SARS as well as by taxpayer submissions. Consistent with international experience, both areas are quite complex, representing systems on top of systems and systems within systems. Much of this complexity stems from their objective and transparent nature. Here it needs to be noted, that true democracy demands that all rules be fully stated within the text of the law. Full disclosure of the law also avoids time-consuming requests for SARS rulings, and the exercise of discretionary powers, all of which could act as barriers against speedy corporate action and could considerably add to otherwise avoidable transaction costs.

Corporate reorganisations are a critical element for any economy. Rules favouring mergers, acquisitions, and other corporate takeovers promote economic efficiency. Takeovers allow more efficient business management to acquire businesses held by the less efficient, thereby promoting the productivity of the economy as whole. Unbundlings are equally important because unbundlings allow companies to flatten highly complex multi-tier share structures or to spin off less efficient structures that best operate as stand-alone entities with more focused activities.

Although special relief for corporate reorganisations dates back many years, these regimes had become too narrow for a modern economy such as ours. The National Treasury accordingly found it necessary to wholly revise this regime, especially since reorganisations could otherwise become an all-encompassing and burdensome tax event with the introduction of CGT. This regime was initially introduced in October 2001, covering company formations, share-for-share acquisitions, intra-group transfers, unbundlings, and liquidations.

The relief described, however, was initially somewhat limited due to possible anti-avoidance concerns. The current Bill now seeks to expand this relief. The new rules allow for a wider array of corporate combinations, additionally cater for amalgamations, and also contain special measures that facilitate the tax-free inbound movement of foreign assets into South Africa. Similarly, this Bill provides for the tax-free acquisition of foreign companies by South African companies.

The most notable aspect of the Bill involves banks, insurance companies, and similar financial institutions. Under law prior to this Bill, these institutions could not partake in tax-free company reorganisations because banks remained the subject of the banking review as a result of their low effective tax rate. The Revenue Laws Amendment Bill lifts these restrictions, thereby ensuring that banks, insurance companies, and similar institutions can fully participate in tax-free reorganisations. This relaxation could be afforded as the banking review revealed that the low effective rate for banks stems largely from other concerns, such as preferred share schemes, leasing schemes, and derivative transactions. While these topics remain a subject of concern, the National Treasury believes that company reorganisation relief is necessary to facilitate the restructuring of financial institutions so as to ensure a more internationally competitive and vibrant financial services sector.

The second major topic for reform contained in the Bill involves the taxation of foreign currency. Foreign currency issues arise as a natural consequence of the newly introduced worldwide tax system and South Africa's increased participation in the global economy. Foreign-earned income and losses must be translated into Rands for purposes of calculating the tax thereon. Foreign currency issues also arise in terms of foreign investments. Many taxpayers generate substantial gains and losses by speculating for and against the currency. This form of activity generates economic wealth just like all other forms of investment wealth.

The Revenue Laws Amendment Bill clarifies many ambiguities and inconsistencies in the foreign currency arena. These problems have emerged because the rules relating to foreign currency have been added piecemeal over the years dating as far back as 1993. The result was an incoherent array of rules that left many perplexed with others seeking avenues for tax avoidance.

The Bill seeks to translate all foreign income and loss into Rands under a unified averaging regime. Under this average regime, taxpayers can either convert all foreign income and loss into Rands utilising a simple average or a weighted average (whichever they so desire as long as they use the same system for all income and loss throughout the same taxable year). Also, taxpayers can elect this averaging on a daily, weekly, or monthly basis. This averaging system clearly means that Government is an equal partner to changes in the value of the Rand.

I would like to assure this House that the taxation of currency speculation, already a subject of change over the last two years, was streamlined consistent with our overall policy. Taxpayers with liquid foreign portfolio investments remain fully subject to tax on their currency gains and losses with respect to those investments. Other assets are ignored. This balanced approach ensures that businesses remain competitive while not being given an artificial incentive to enter into foreign currency speculation. Limited taxation of these gains also ensures easier enforcement and compliance. For instance, the new regime wholly ignores currency gains stemming from private travel and comparable personal expenditure. Such gains are time-consuming to process, tedious for compliance, and generate little real government revenue.

The Revenue Laws Amendment Bill further seeks to resolve some longstanding administrative problems that have emerged over the last two years. These issues involve business travel and the taxation for foreign diplomats.

Under prior law, taxpayers could disregard advanced lump-sum domestic and foreign travel allowances for purposes of their tax calculations if those sums fell within specified monetary thresholds. These rules allowed taxpayers to disregard any tax on these sums without the use of tedious receipts, which were difficult for taxpayers to maintain and wasteful for SARS to review. All what was needed was proof of actual travel. Problems had arisen as of late with these advances because the monetary thresholds had become obsolete, wholly insufficient to cover rising domestic and international costs of travel. The Revenue Laws Amendment Bill modifies these thresholds by leaving them to periodically be fixed by Government stipulated in the Gazette. As announced in the Portfolio Committee on Finance, these advances are currently fixed at $190 for foreign travel, R173 for domestic travel to the extent the advance covers meals and incidental subsistence, and R53 for advances covering only subsistence.

The taxation of diplomats had also become an issue over the last few years. As a matter of legal interpretation and administration, SARS correctly applied the law by asserting that all foreign allowances received by diplomats were subject to tax. However, full debate on the matter reveals that the law itself needed change. No policy reason exists for taxing diplomats on their foreign related allowances. It is well recognised internationally that diplomats fall within their own "sui generis" category of taxation given the unique demands of their tasks. The Revenue Laws Amendment Bill accordingly exempts these foreign related allowances. Our diplomats can now operate free from tax at their foreign posts as originally intended.

Like all tax bills, the Revenue Laws Amendment Bill is not entirely free from controversy. These areas of controversy fall into 3 areas—

• Issues of process; and
• Rules to prevent avoidance of Transfer Duty

Some practitioners have criticised the Bill for its volume. What these tax practitioners fail to recognise, however, is that these changes were largely designed to assist taxpayers at their own insistence. Indeed, many of the practitioners in the Parliamentary hearings who complained about the volume of changes simultaneously asked for even greater change and tax relief. These comments seeking greater change amounted to over half of the requests submitted. Surely taxpayers cannot have it both ways - they either want change or not. They cannot ask Government to make change in their favour and then condemn Government on the grounds that the level of change is too much to handle.

In terms of process, some practitioners criticised Government for its failure to provide timely consultation prior to the Parliamentary hearings. Government had admittedly hoped to provide for more time in this regard but was effectively caught between a "rock and a hard place." Government had essentially two choices. Government could either—

• act now at the insistence of many taxpayers so they could move forward with their legitimate business transactions; or
• Government could delay the relief until next year in favour of a longer comment period.

Government ultimately believed that immediate relief best served the economic needs of the country. We reiterate our belief, as espoused in the 2002 Budget review, that South Africa's tax policy ultimately needs a period of consolidation. With the main base-broadening objectives achieved during the last 2 years, the volume of future tax bills can be reduced in favour of more in-depth consultation.

As announced in the 2002 Budget Review, Government had become increasingly concerned about techniques employed to artificially avoid the Transfer Duty on the sale of residential and holiday homes. These avoidance techniques unnecessarily narrow the tax base, thereby increasing the rate for taxpayers who transfer their residential properties without such artificial ploys. Clearly, this avoidance has become a matter of equity and was in urgent need of reform.

Prior to the Bill, many taxpayers were previously able to avoid the Transfer Duty by placing ownership of that residential property into a company or trust. These taxpayers would then sell the shares or trust interests free of any Transfer Duty that would have otherwise applied had that residential property been sold directly. The Bill terminates this artifice by imposing the Transfer Duty despite the existence of these company and trust structures. No legitimate economic reason exists for these forms of property to be owned by a company or trust when most homeowners would otherwise hold these residential properties directly.

Madam Speaker, I would like to conclude by thanking everyone involved in the preparation of this Bill, including members within SARS, the National Treasury's tax policy unit, Parliamentary members within the Portfolio Committee on Finance, and interested parties commenting constructively on the Bill. Once again, the open transparent nature of the deliberation process only serves to improve the overall quality of tax legislation.

I hereby table the Revenue Laws Amendment Bill, 2002.